SEC’s Gensler May Face an Unbeatable Foe in Crypto

Despite a barrage of enforcement actions, the agency is flailing.

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Gary Gensler, chairman of the U.S. Securities and Exchange Commission, gave a stinging indictment of crypto in congressional testimony this week, proclaiming, “I’ve been around in finance for 44 years now, I guess, and I’ve never seen a field that’s so rife with misconduct – it’s just daunting.”

In the wake of FTX’s dramatic flameout, Gensler warned lawmakers with the Senate Banking Committee on Tuesday that he doesn’t think the agency, considered to be the top watchdog for corporate America, has the necessary staff to prevent abuse, noting that the SEC is about 3 percent larger than it was seven years ago, while the markets have grown 50 to 70 percent in activity and complexity.

This state of affairs has not served Gensler well in his war on crypto, which so far is largely failing – and may continue to fail, as even his predecessor, Jay Clayton, who once blasted crypto as a threat to the hegemony of the U.S. dollar, strolled into a plum gig as a crypto advisor once he left the SEC. 

In a recent interview on CNBC, Clayton explained how he had also been skeptical of crypto, but concluded that popular cryptocurrencies like Bitcoin and a growing list of Blockchain innovations are important technologies whose “approval is inevitable.”

On the way to these presumed approvals, however, stretches a battlefield littered with SEC enforcement actions, lawsuits, charges and blistering accusations of violations of federal securities law by the agency against some of the biggest crypto-trading firms and exchanges in the world, including San Francisco-based Coinbase and Caymans-based Binance. 

Both companies deny wrongdoing, with Coinbase in particular taking the highly unusual step – especially for a multibillion-dollar company – of ferociously scrapping with the SEC in public and kicking off a Stand With Crypto campaign to air its issues and enlist public support for its defense. 

One reason Coinbase might feel comfortable engaging in such a public brawl could be that this is a situation where there’s really no established case law.

Coinbase has not only dropped numerous tweets, podcasts and blogs containing its and the SEC’s court filings and legal documents, but its co-founder and chief executive, Brian Armstrong, suggested it may be time for a new SEC chairman, given Gensler’s intransigence and how agency leadership “has taken a very hostile view” toward crypto. In an interview last week, he remarked, “Maybe next year we’ll have a different SEC chair.” 

Armstrong added that Coinbase doesn’t plan to move offshore – as many other crypto companies have done – in response to America’s unfriendly regulatory environment – but insisted that the SEC must do a better job of providing clarity and cooperation around its crypto rules rather than rejecting crypto applications and suing crypto exchanges.

To be sure, it is not disingenuous for crypto companies to call the current regulatory terrain punitive and confusing. The rules of crypto at the SEC, which has called cryptocurrency a security, have often been at odds with the rules of crypto at the U.S. Commodity Futures Trading Commission, which has called cryptocurrency a commodity.

“The SEC and CFTC have made conflicting statements, and don’t even agree on what is a security and what is a commodity,” Armstrong said earlier this year, adding, “Instead of publishing a clear rulebook, the SEC has taken a regulation-by-enforcement approach that is harming America.”

In Gensler’s testimony on the oversight of his agency before the Senate Banking, Housing and Urban Affairs Committee, he said he sees it as strictly enforcing laws that have been on the books for decades. 

“Congress could have said in 1933 or in 1934 that the securities laws applied only to stocks and bonds,” Gensler said in his prepared remarks. “Yet Congress included a long list of 30-plus items in the definition of a security, including the term ‘investment contract.’ As I’ve previously said, without prejudging any one token, the vast majority of crypto tokens likely meet the investment contract test. Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well.”

Republican presidential candidate and South Carolina Sen. Tim Scott took the SEC chairman to task for overreach, making a “power grab” and “stifling innovation.” He told Gensler this week, “I have serious concerns with the way you are leading the SEC,” observing a lack of accountability by the agency and how the SEC had fallen short of its obligation to be “transparent and responsive to congressional oversight.” 

Other senators were more supportive, including Senate Banking Committee chair Sherrod Brown, a Democrat from Ohio, who said that “bad actors keep flocking to crypto.” 

To be fair, cryptocurrencies and crypto companies remain a veritable Wild West and Gensler isn’t wrong to caution how they are fraught with peril.

Data from the U.S. Federal Trade Commission indicates more than 46,000 individuals reported losing more than $1 billion in aggregate from crypto scams from January 2021 to June 2022, and no one can claim that these past few years haven’t been filled with crypto frauds galore. (Anyone remember Three Arrows’ yacht-buying spree, as it slid into bankruptcy?)

Still, Gensler’s scorched-earth policy against crypto means that even well-meaning companies keep coming up short when filing with the agency to introduce new crypto products and technologies. There have been few cases where this has been more apparent than the late August appeals court finding in which a three-judge panel deemed the SEC’s rejection of an application for a Bitcoin exchange-traded fund from Grayscale Investments “arbitrary and capricious.” 

At the forefront of what comes next will be whether the SEC can establish it should have purview of the rapidly expanding cryptoverse – and whether many crypto offerings are, indeed, securities.

In his recent interview with CNBC, former SEC chair Clayton said he was not so sure the SEC would prevail. “As this has developed, it is clear Bitcoin is not a security,” he noted, adding, “Crypto is a technology.” 

“Now the SEC has to deal with the line between securities offerings and trading – and non-securities trading and offerings.” Clayton said crypto assets are “something that retail investors want access to, that institutional investors want access to.”

Gensler may have backed himself into a corner on crypto but, as Wall Street’s top cop, he can still outlast his crypto foes by continuously appealing, even if he can’t win — at least, until he leaves his post — market observers say.

“He’s clearly engaged in a shadow ban on anything crypto,” the insider familiar with Coinbase’s SEC battle says. “What we are seeing with these lawsuits and crypto applications is that the SEC keeps stalling or appealing or just asking endless, disingenuous questions. Think about it, if you work for Gensler, do you really feel comfortable approving anything crypto?”

His prediction: “Gensler will appeal all these cases until he leaves the SEC and, once he’s out, he’ll take a high-paying job in crypto, just like everybody else.”